The iShares MSCI United Kingdom ETF (NYSEArca: EWU), the largest U.K. exchange traded fund trading in the U.S., is up 7.3% year-to-date, an impressive performance against the backdrop of Brexit negotiations and the surprise U.K. election, which is coming in just a few weeks.
“UK equities have done well. But much of the FTSE 100’s 20% surge since the Brexit vote boils down to a weak pound and rebounding commodity prices flattering the index, given the heavy weight of global banks and miners. For unhedged foreign currency investors, the outcome is less impressive: a gain of less than 1% in USD terms,” said BlackRock in a recent note.
Currency hedged ETFs, including the iShares Currency Hedged MSCI United Kingdom ETF (NYSEArca: HEWU), WisdomTree United Kingdom Hedged Equity Fund (NasdaqGM: DXPS) and Deutsche X-Trackers MSCI United Kingdom Hedged Equity ETF (NYSEArca: DBUK), are benefiting from sterling weakness.
Some market observers believe U.K. stocks are shaping well on a technical and have the potential to deliver more near-term upside.
“After about a 3.5% pop to start the year, the FTSE returned to test the level of its breakout, around 7100, near the end of January, as we indicated to investors at the time. Or, as we put it, the FTSE appeared to be giving investors another chance to ‘board the FTSE bus’ prior to an ultimate run higher. Indeed, the test proved successful and the FTSE subsequently took investors along for a ride, to the tune of 5% into mid-March,” according to ETF Daily News.
United Kingdom stocks have strengthened on a weakened pound sterling as major exporters enjoy a more competitive currency. While the volatility in the pound may deter some, investors can look to currency-hedged exchange traded fund strategies to take a purer play on the underlying British markets.
There are still questions over how leaders can amicable separate the U.K. from the European Union without a large fallout. Talks are expected to continue after the U.K.’s snap June elections.
“However, last week, following the snap election news out of the UK, the FTSE bus once again returned to the spot of its breakout, giving investors one more chance to hop aboard. However, they needed to hop on quickly as the FTSE has already sped out of the station as if driven by one of those belligerently impatient bus drivers. Specifically, the FTSE popped higher yesterday, gaining more than 2%,” reports ETF Daily News.
Financial services stocks account for 21% of EWU’s weight while consumer staples and energy names combine for over 31% of the ETF’s roster.
For more information on the GBP, visit our British pound category.